CNN Bank-10/3/2022

Silicon Valley Bank collapses after failing to raise capital

Silicon Valley Bank collapsed Friday morning after a stunning 48 hours in
which a bank run and a capital crisis led to the second-largest failure
of a financial institution in US history.

California regulators closed down the tech lender  and put it under the
control of the US Federal Deposit Insurance Corporation. The FDIC is
acting as a receiver, which typically means it will liquidate the bank’s
assets to pay back its customers, including depositors and creditors.

The FDIC, an independent government agency that insures bank deposits and
oversees financial institutions, said all insured depositors will have
full access to their insured deposits by no later than Monday morning. It
said it would pay uninsured depositors an “advance dividend within the
next week.” The bank, previously owned by SVB Financial Group, didn’t
respond to CNN’s request for comment.

What happened?

The wheels started to come off on Wednesday, when SVB announced it had
sold a bunch of securities at a loss and that it would sell $2.25 billion
in new shares to shore up its balance sheet. That triggered a panic among
key venture capital firms, who reportedly advised  companies to withdraw
their money from the bank.

The company’s stock cratered  on Thursday, dragging other banks down with
it. By Friday morning, SVB’s shares were halted and it had abandoned
efforts to quickly raise capital or find a buyer. Several other bank
stocks were temporarily halted Friday, including First Republic, PacWest
Bancorp, and Signature Bank.

The mid-morning timing of the FDIC’s takeover was noteworthy, as the

agency typically waits until the market has closed to intervene.

“SVB’s condition deteriorated so quickly that it couldn’t last just five

more hours,” wrote Better Markets CEO Dennis M. Kelleher. “That’s because
its depositors were withdrawing their money so fast that the bank was
insolvent, and an intraday closure was unavoidable due to a classic bank
run.”

Silicon Valley Bank’s decline stems partly from the Federal Reserve’s
aggressive interest rate hikes over the past year.When interest rates
were near zero, banks loaded up on long-dated, seemingly low-risk
Treasuries. But as the Fed raises interest rates to fight inflation, the
value of those assets has fallen, leaving banks sitting on unrealized
losses.
Higher rates hit tech especially hard, undercutting the value of tech
stocks and making it tough to raise funds, Moody’s chief economist Mark
Zandi said. That prompted many tech firms to draw down the deposits they
held at SVB to fund their operations.

“Higher rates have also lowered the value of their treasury and other
securities which SVB needed to pay depositors,” Zandi said. ” All of this
set off the run on their deposits that forced the FDIC to takeover SVB.”

Deputy Treasury Secretary Wally Adeyemo on Friday sought to reassure the

public about the health of the banking system after the sudden collapse
of SVB.

“Federal regulators are paying attention to this particular financial

institution and when we think about the broader financial system, we’re
very confident in the ability and the resilience of the system,” Adeyemo
told CNN in an exclusive interview.

The comments come after Treasury Secretary Janet Yellen convened an

unscheduled meeting of financial regulators to discuss the implosion of
Silicon Valley Bank, a major lender to the hurting tech sector.

“We have the tools that are necessary to [deal with] incidents like
what’s happened to Silicon Valley Bank,” Adeyemo said.

Adeyemo said US officials are “learning more information” about the

collapse of Silicon Valley Bank. He argued the Dodd-Frank financial
reform overhaul, signed into law in 2010, has given regulators the tools
they need to address this and improved the capitalization of banks.

Adeyemo declined to predict what, if any, impact there will be to the

broader economy or the tech industry.

Echoes of 2008

Despite initial panic on Wall Street over the run on SVB, which caused
its shares to crater, analysts said the bank’s collapse is unlikely to
set off the kind of domino effect that gripped the banking industry
during the financial crisis.

“The system is as well-capitalized and liquid as it has ever been,” Zandi

said. “The banks that are now in trouble are much too small to be a
meaningful threat to the broader system.”
But smaller banks that are disproportionately tied to cash-strapped
industries like tech and crypto may be in for a rough ride, according to
Ed Moya, senior market analyst at Oanda.

“Everyone on Wall Street knew that the Fed’s rate-hiking campaign would
eventually break something, and right now that is taking down small
banks,” Moya said.

‘Idiosyncratic situation’
While relatively unknown outside of Silicon Valley, SVB was among the top
20 American commercial banks, with $209 billion in total assets at the
end of last year, according to the FDIC.

It’s the largest lender to fail since Washington Mutual collapsed in

2008.

The bank partnered with nearly half of all venture-backed tech  and health
care companies in the United States, many of which pulled deposits out of
the bank.

Mike Mayo, Wells Fargo senior bank analyst, said the crisis at SVB may be
“an idiosyncratic situation.”

“This is night and day versus the global financial crisis from 15 years
ago,” he told CNN’s Julia Chatterly on Friday. Back then, he said, “banks
were taking excessive risks, and people thought everything was fine. Now
everyone’s concerned, but underneath the surface the banks are more
resilient than they’ve been in a generation.”

Rate hikes take a bite

SVB’s sudden fall mirrored other risky bets that have been exposed in the
past year’s market turmoil.
Crypto-focused lender Silvergate said Wednesday it is winding
down  operations and will liquidate the bank after being financially
pummeled by turmoil in digital assets. Signature Bank, another lender,
was hit hard by the bank selloff, with shares sinking 30% before being
halted for volatility Friday.

“SVB’s institutional challenges reflect a larger and more widespread

systemic issue: The banking industry is sitting on a ton of low-yielding
assets that, thanks to the last year of rate increases, are now far
underwater — and sinking,” wrote Konrad Alt, co-founder of Klaros Group.
Alt estimated that rate increases have “effectively wiped out
approximately 28% of all the capital in the banking industry as of the
end of 2022.”

Why didn’t regulators see it coming? (Daily Star-14/3)

With hindsight, there were warning signs ahead of last week's spectacular
collapse of Silicon Valley Bank, missed not only by investors, but by bank
regulators.

Just why the oversight failed remained a hot question among banking experts
Monday, with some focusing on the weakness of US rules.

The Federal Reserve announced Monday plans for a "thorough, transparent and
swift" review of the supervision of SVB that will be publicly released on May
1, effectively acknowledging that it could have done better.

President Joe Biden promised a "full accounting of what happened," adding

that he would ask regulators and banking regulators to tighten rules on the
sector.

Banking experts have been among those alarmed at the rapid collapse of SVB,
the country's 16th biggest bank by assets and how its demise became a
harbinger of Sunday's failure of another lender, Signature Bank.

The failures have "exposed the inadequacy of regulatory reforms that have
been made since the global financial crisis," said Arthur Wilmarth, a law
professor at George Washington University.

A once-over of the bank would have pointed to clear potential red flags in
SVB's disproportionate exposure to tech startups, a risky area that can be
likened to commercial real estate or emerging markets -- areas that have
plagued lenders in the past.
Wilmarth noted that SVB grew very fast between 2020 and 2022 and that its
exposure to long-date fixed interest bonds made it especially vulnerable to
the a shift in monetary policy by the Fed.

"That's almost a sure proof formula for failure. If the economy turns you
begin to have trouble," Wilmarth said.

"None of those would have been a mystery to the regulators."

Experts pointed as well to the eventual easing of US laws enacted soon after
the 2008 crisis.

The original Dodd-Frank law of 2010 imposed higher capital, liquidity and
other requirements on banks with at least $50 billion in assets.

In 2018, with support from former President Donald Trump, this requirement
was raised to $250 billion, affecting fewer banks.

But that shift in law does not excuse regulators for these failures,
according to Anna Gelpern, a law professor at Georgetown University.

"When regulatory requirement are relaxed either by the premise that those
institutions don't pose a risk to the system because of their size or that
they are easier to supervise, that puts much more pressure on old-fashioned
supervision because you don't have the automatic alarm that goes off with the
requirements," she said.

"If this was clearly unsafe and unsound behavior," the banks' official
designation in the law "does not excuse a failure of supervision," she said.

Michael Ohlrogge, an associate professor of law at New York University, said

regulators as a matter of course assign "very little to zero-risk weight" in
terms of bank capital requirements for Treasury-linked securities because
they are considered safe.

At the same time, regulators are also lenient with banks with regard to
depositors with more than $250,000 -- the threshold for federally insured
deposits -- believing the bank has a meaningful business relationship with
such clients.

"That's probably going to warrant revisiting and thinking more seriously

about the run risk of uninsured deposits," Ohlrogge said.